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"If you build it, they will come" is no mantra for exchange-traded-fund sponsors these days. The fast-growing industry has entered a pruning phase. A record 86 funds have been shuttered so far this year, as sponsors throw in the towel on unpopular, asset-starved products.

Little wonder. It's tough to make money with ETFs that themselves don't manage much cash. The ETF industry has amassed $1.3 trillion in roughly 1,450 funds, but nearly half of those ETFs have less than $30 million each in assets, according to research firm XTF. This year's closures have included all but one of Russell Investments' 26 ETFs, Scottrade's entire FocusShares lineup, and a dozen complex
UBSUBS -3.339306358381503%UBS Group AGU.S.: NYSEUSD16.7223
-0.5777-3.339306358381503%
/Date(1481300906318-0600)/
Volume (Delayed 15m)
:
942729
P/E Ratio
18.20108695652174Market Cap
67500358886.4713
Dividend Yield
1.4726602682916035% Rev. per Employee
617331More quote details and news »UBSinYour ValueYour ChangeShort position
(ticker: UBS) volatility-trading products.

But there's good news in the trend: Pruning makes the tree healthier. Just ask Northern Trust, which shows there's life after an ETF shutdown. The 123-year-old trust bank and wealth manager is creating a successful exchange-traded-fund business just a few years after shutting its entire roster of 17 ETFs. That first act, which featured a host of single-country index trackers, purported to give investors direct access to international stock indexes, such as France's CAC 40 and the United Kingdom's FTSE 100. But investors didn't bite. Not even a year after their launch, the ETFs, which had just $30 million in assets across all 17 products, were shut down.

Here's what's different: Northern Trust's new ETF business bucks the trend of launching dozens of ETFs and seeing what sticks. The firm's second act features products that are also highly specialized, but built specifically to serve the wealthy individual and institutional investors that are the bank's bread-and-butter clients; that means ETFs for investors who fear inflation but still want to own government bonds, and a fund for those eager to reach into natural resources, like water and timber, to diversify. The company's most successful ideas grew out of conversations with (and about) its high-net-worth clients, and the asset flows attest to the effort.

The scattershot approach to launching ETFs is starting to result in many closures. Turns out, building a better ETF requires a bit more planning.
Matt Collins for Barron's

FlexShares, as Northern Trust's year-old ETF group is called, still remains one of the industry's smallest players, with just six products. But Northern Trust amassed more than $250 million in its first four ETFs within a few weeks of their September 2011 launch. By January, they passed the half-billion mark, en route to $1.7 billion today, a sign that the bank was meeting demand it knew would be there, says Morningstar director of fund research Scott Burns. "You've got somebody on the inside who said, 'What I really want is this liquid, transparent, and tradable vehicle,' " Burns says. "They say, 'I would buy it. I would buy a lot of it.' "

Northern Trust doesn't break out its ETF assets by customer type, according to FlexShares head Shundrawn Thomas, who says the story is more complicated. Early marketing efforts focused on registered investment advisors and others able to make quicker investment decisions than a slow-moving pension fund, Thomas says. But he also says that Northern Trust's existing customers were key. The idea for the company's most successful ETF was born from experiences with existing clients, Thomas says, with the hunch that those needs probably weren't unique.

The Bottom Line

Nearly half of the 1,450 ETFs on the market have less than $30 million in assets. That's way too small to be profitable, which means investors can expect more fund closures.

FlexShares' second-most popular ETF is a natural-resources fund. It's suited to investors who want to stick with equities rather than deal with the complexities of funds tracking commodity futures. The $523 million
FlexShares Morningstar Global Upstream Natural Resources IndexGUNR -0.26999662504218697%FlexShares Global Upstream Natural Resources Index FundU.S.: NYSE Arca29.55
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94579
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1.7011295231653702% Rev. per Employee
N/AMore quote details and news »GUNRinYour ValueYour ChangeShort position
Fund (GUNR) invests in companies that mine, grow, harvest, and search for commodities, and it is less energy-heavy than the typical natural-resources fund. Allocations include nearly 9% to gold, 4% apiece to water and timber, and 25% to fertilizers and agricultural chemicals. There's also the $126 million
FlexShares Morningstar U.S. Market Factor Tilt Index
Fund (TILT), a U.S. equity fund that favors small companies and value stocks. Last month, the firm launched two international variants of the "tilt" idea. The firm has at least six other products in registration with regulators, including a seven-year-duration TIPS fund and six dividend-themed funds.

These ETFs may be highly specialized (and not for everyone), but they're not going anywhere.